Trustees and administrators of Ontario registered pension plans: beware of Form 7.

That’s the form that administrators of registered pension plans must complete, and send to their pension fund trustees, that summarizes the estimated employer and employee contributions that will be due to be made to the pension plans in future. The form must be provided by the registered administrator of every Ontario registered pension plan to the trustee, at least annually. If there’s a change to the estimated future pension contribution requirements, the administrator must send a revised Form 7 to the pension fund trustee within 60 days of becoming aware of the change.

Trustees of pension plans (which for this purpose include insurance companies) are not required to complete Form 7’s. But trustees have an important, independent legal obligation to notify the Ontario Superintendent of Financial Services if they do not receive the required Form 7. Further, if contributions to the pension plan are not received by the trustee in accordance with the estimates in the Form 7 received by the trustee, the trustee must notify the Superintendent. There are prescribed time limits for all of these requirements.

In essence, the Form 7 rules require pension fund trustees to police timely plan contributions. The law requires trustees to blow the whistle if a plan administrator is not making contributions on time.

In 2013 a trustee was prosecuted in Ontario for failing to report the non-filing of a Form 7 with respect to a plan administrator who eventually filed for bankruptcy protection from its creditors. The trustee plead guilty and was fined $50,000.

The gravity of compliance with Form 7 rules was recently emphasized by the Ontario pension regulator in an announcement that can be found here. A few days ago, the regulator released a revised Form 7 that can be found here, as well as a comprehensive User Guide that can be found here, to assist plan administrators in completing Form 7. It also released two new standardized templates, to be used by pension fund trustees to report to the Superintendent when a plan administrator fails to submit a Form 7, or fails to make the contributions as summarized in a Form 7. The templates can be found here.

Although Form 7 is a prescribed form, it does not have to be filed with the Ontario pension regulator. It is simply a required communication from plan administrators to pension fund trustees. Do not take this as an indication that the Ontario pension regulator is indifferent about compliance with the Form 7 rules. It has clearly demonstrated that it requires compliance, and it has provided a guide and templates to assist the pension industry with the rules.

To remain relevant and effective, industry regulators need to stay current. They must be attentive to economic realities, adapt to new technology and evolve with the industries they regulate. Ontario’s pension regulator is overdue for a major overhaul that will bring it into the 21st century.

Ontario’s Fall 2016 Economic Statement announced that government’s intention to introduce a new financial services regulator which will be known by the acronym FSRA (Financial Services Regulatory Authority). The FSRA announcement came shortly after the release of the Final Report, of the Ontario Expert Advisory Panel mandated to examine the Financial Services Commission, Financial Services Tribunal and Deposit Insurance Corporation.

The March 31, 2016, cover letter that accompanied the Panel’s Final Report stated that its recommendations for a ‘world-class regulatory system’ were prepared with “both the present and future in mind, and in light of industry and regulatory trends here and around the world.” It also recognized the rapid pace of change in the financial and pension sectors and concluded that the agencies under review had to be modernized and sufficiently independent, flexible, innovative and expert to facilitate the changes in governance, structure and accountability necessary to achieve the desired result.

Panel recommendations of particular relevance to the pension industry include:

FSRA should operate as an integrated financial services regulator with responsibility for, among other things, consumer protection (referred to as ‘market conduct’), prudential oversight and pension plans;

FSRA should be directed to protect beneficiaries while promoting a strong sustainable pension system that would operate in an efficient and fair manner, balancing the interests of all parties;

FSRA’s mandate should require it to use its authority to adequately, firmly and consistently discourage fraudulent activities or behaviours that mislead or harm consumers and pension plan beneficiaries;

FSRA’s mandate should require that it undertake its activities in a proactive manner;

to remain relevant and flexible, FSRA’s mandate should include a commitment to innovation and transparency – to stay abreast of those issues that could compromise its ability to satisfy its mandate;

the existing Financial Services Tribunal, which is housed within the current Financial Services Commission and, therefore, subject to potential conflicts, should be established as an independent tribunal with its own budget funded by government; and

the Financial Services Tribunal should have authority to adjudicate matters clearly articulated in its enabling statute, including appeals from certain decisions of FSRA.

Bill 70, Building Ontario Up for Everyone Act (Budget Measures), 2016, was introduced by the Ontario government on November 16, 2016, and passed ‘First Reading’ in the Legislative Assembly. Among other things, this omnibus legislation would:

amend the Pension Benefits Act (Ontario) (PBA) to provide the Superintendent of Pensions with authority to impose significant administrative penalties for contravening or failing to comply with the PBA.

It is too soon to tell whether all aspects of the Panel’s recommendations will be implemented by the Ontario government. The proposed legislation is bare bones and creates only the framework for the FSRA. It does not set a clear mandate other than the fact that FSRA will regulate specific financial sectors of the Ontario economy.

On the other hand, proposed changes to the PBA clearly demonstrate a new regime involving administrative penalties – a hallmark of modern regulatory systems, providing the muscle to enforce compliance. If adopted, the amendments will enable the Superintendent to quickly impose meaningful administrative penalties (up to $25K for corporations and $10K for individuals) to ensure compliance with legislative requirements, orders and undertakings. As an added jolt, administrative penalties may not be paid from the pension fund of an offending administrator.

While there is a right to a hearing if an administrative penalty is proposed by the Superintendent, the process is swifter and more appropriate than current regulatory measures that require Crown prosecution under the Provincial Offences Act (Ontario). The difference between an administrative penalty and offences prosecution can be likened to the difference between a speeding ticket and a drunk-driving charge. Both involve motor vehicles, but in the former case you can pay your fine and drive away, while in the latter you’re obliged to spend time in court and will likely want a lawyer.

Bill 70 represents an initial response to the Panel’s numerous recommendations. Nevertheless, with just these preliminary changes, pension administrators and their agents should brace for more fines and greater enforcement in the future. Industry professionals expect the Ontario government to implement more Panel recommendations in 2017 and sense that they are witnessing the creation of a modern, responsive and far more dynamic pension regulatory system for Ontario.

In my August 17, 2016 post (found here), I summarized Ontario’s recent changes to the Pension Benefits Act and Regulation that require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated. I noted that while the incorporation of ESG factors into a pension plan’s SIPP is not a statutory requirement, the question arises as to whether a failure to consider ESG factors in your pension plan’s SIPP could be a breach of fiduciary duty. I didn’t answer the question directly but did say that many of Canada’s largest public sector pension funds have now incorporated ESG into their investment policies.

Given that provincial pension legislation requires plan administrators to exercise the care, diligence and skill that a person of ordinary prudence would exercise when dealing with the property of another person, would that exercise not, by logical extension, include investigation of the consideration of ESG factors in the assessment of creditworthiness of investee entities?

Recent announcements by some of the world’s largest credit rating agencies recognize that ESG factors can affect borrowers’ cash flows and the corresponding likelihood that they may default on their debts. S&P Global Ratings, Moody’s, Dagong, Scope, RAM Ratings and Liberum Ratings signed a “Statement on ESG in Credit Ratings” (the “Statement”) in May of this year acknowledging that ESG factors are important elements in assessing creditworthiness of borrowers and, for corporations, “concerns such as stranded assets linked to climate change, labour relations or lack of transparency around accounting practices can cause unexpected losses, expenditure, inefficiencies, litigation, regulatory pressure and reputational impacts.”

Included in the Statement are 100 investors managing US $16 trillion of assets, all of whom are signatories to the six UN-supported Principles for Responsible Investment wherein the investors affirmed their commitment to:

Several well-known Canadian institutional investment corporations are included in the list of 100 investors.

Rating agency reports that incorporate ESG factors in the assessment of credit risk may soon form part of the statement of the valuation method process required by pension regulators.

The Fall 2016 Corporate Knights article, Credit ratings and climate change, cited a 2015 report from the Center for International Environmental Law, which accused the rating agencies of repeating their risk analysis mistakes from the sub-prime mortgage debacle when it comes to fossil fuel investments: “In assuming a business as usual scenario, rating agencies may be artificially inflating the credit ratings and financial value of companies that contribute to global warming”. The report added that “This poses significant risks for investors, and the climate, and could expose rating agencies themselves to legal liability.” The May 2016 Statement on ESG in Credit Ratings appears to be the first step in addressing the gap in credit rating which doesn’t necessarily consider sustainability and governance factors in credit ratings and analysis.

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled when they embark on considering ESG factors in their investment decision making process.

If you are involved with the administration of an Ontario registered pension plan, you should familiarize yourself with new Ontario rules regarding pension advisory committees. The new rules will be effective January 1, 2017. They give significant additional rights to plan members, and could impose extra costs and administrative burdens on plan administrators. You can find the new rules here: Ontario Pension Advisory Committee Rules

I wrote about these new rules a few weeks ago, when draft regulations were released by the Ontario government. The regulations are now final and are described in my article here: Pension Article

It is possible that these new rules will have no impact on your plan. If unions and plan members take no action, plan administrators are under no obligation to take any action. There will be no pension advisory committee in that case. But if a request is made by a union, or by at least ten members of a plan (including retirees), the new rules will be triggered. The rules set out a clear and detailed process to communicate the request with all plan members, distribute materials and conduct a vote.

If the majority of plan members decide to establish an advisory committee, the plan administrator is then required to do several things, including:

hold the initial meeting,

give the committee or its representative “such information as is under the administrator’s control and is required by the committee or its representative for the purposes of the committee”,

make the plan actuary available to meet with the committee at least annually if the plan provides defined benefits,

ensure that the committee has access to an individual who can report on the investments of the pension fund at least annually, and

provide administrative assistance to the committee.

The pension advisory committee will not have any legal authority to dictate how the plan should be administered. The new legislation says simply that “[T]he purposes of an advisory committee are (a) to monitor the administration of the pension plan; (b) to make recommendations to the administrator respecting the administration of the pension plan; and (c) to promote awareness and understanding of the pension plan.”

Reasonable costs related to the establishment and operation of the committee are payable out of the pension fund.

Please contact a member of the Pension, Benefits and Executive Compensation group at Dentons Canada LLP for more information about this potentially significant change to the governance of Ontario registered pension plans.

On October 19, 2016, the federal government introduced Bill C-27 which, if passed, will permit federally-regulated employers to establish single-employer and multi-employer target benefit plans. The bill proposes to amend the Pension Benefits Standards Act, 1985 to add target benefit plans as an alternative to the traditional defined benefit (DB) and defined contribution (DC) plan design options. Following the steps of other Canadian jurisdictions like New Brunswick, Alberta and British Columbia, Bill C-27 addresses the perceived need for alternative pension plan designs as a way to increase and/or improve pension plan coverage in the private sector. If you are a federally-regulated employer seeking to establish a new pension plan, or re-evaluate or re-design your current pension and retirement savings program, you may want to consider target benefit plans.

Target benefit plans contain both DB and DC plan design features. They aim to provide members with a defined monthly pension benefit at retirement, similar to a DB plan, but are funded through fixed contributions, like in a DC plan. Depending on the funding level of the plan, benefits (including accrued benefits and future benefits) may be adjusted.

Like other provincially regulated employers, federally-regulated employers (such as banks, airlines, railways and telecommunications companies) are seeking ways to control the volatility of pension contributions and the often corresponding negative impact on their balance sheets associated with DB plan designs. The ability to create target benefit plans would offer employers with an opportunity to provide sustainable and predictable pension benefits with more cost certainty and without the solvency liability risk associated with traditional DB plans.

While many details regarding the federal target benefit plan framework will be set out in regulations that have yet to be released, some of the main features being proposed include the following:

Target benefit plans must be created as new plans. Converting an existing pension plan into a target benefit plan will not be permitted. However, pension benefits under an existing pension plan may be surrendered by members in exchange for pension benefits under a target benefit plan with the member’s informed consent.

Target benefit plans must be administered by a board of trustees or other similar body.

A written governance policy must be established for the plan, in accordance with the regulations.

A funding policy must be established for the plan. The funding policy is required to include, among other things, the rate of employer and, if applicable, employee contributions; the objectives of the plan with respect to pension benefit stability; a deficit recovery plan; and a surplus utilization plan.

Once a target benefit plan’s objectives regarding pension benefit stability are established, they cannot be amended. In addition, an amendment reducing accrued benefits is void unless it complies with the plan’s funding policy.

If DB benefits under an existing pension plan are surrendered and transferred to a target benefit plan and the target benefit plan is terminated within five years of the transfer, members will be entitled to the greater of the benefit under the original pension plan and the target benefit plan.

The introduction of Bill C-27 is a positive step towards providing more choice to employers in pension plan design options which will hopefully encourage more employers to offer, and continue to offer, pension plans as part of their employee benefits package.

We will keep you posted on any new developments regarding target benefit plans and the proposed federal legislation.

Yesterday the federal government tabled Bill C-26, which will implement changes to the Canada Pension Plan that were announced in June, 2016. All provinces other than Quebec are now on board, in support of increased employer and employee contributions, and higher benefits. The higher contribution rates will not apply until January 1, 2019. They will be phased in gradually over seven years (from 2019 to 2025).

Commentators refer to these changes as “historic”. It has been decades since significant changes were made to the CPP. The reality is that the Canadians who should be happiest about these changes are teenagers, since it will be many years until significantly higher benefits are paid from the CPP.

We will be providing more details about the CPP changes in the coming weeks.

In November 2008, the Alberta/British Columbia Joint Expert Panel on Pension Standards (JEPPS) released its report on pension standards in the two provinces. The report, Getting Our Acts Together, encouraged the two provincial governments to take a leadership position in pension reform and forge harmonized pension standards legislation which would provide a solid foundation for private sector pension plans and facilitate inter-provincial labour mobility.

The JEPPS’ vision of a fully harmonized joint-regulatory environment for Canada’s two westernmost provinces failed to materialize. The vision was left on the cutting-room floor, so to speak, as Alberta adopted its reformed pension standards legislation in 2014 and BC followed-suit with its own in 2015 – absent any joint regulator, joint tribunal or joint policy advisory council, as recommended in the JEPPS report.

That said, the new Acts themselves are principles-based, as opposed to rules-based, and there is a great deal of harmonization between the two, including the requirement for plan administrators to complete a triennial administrative assessment (TAA) for their pension plans.

TAA Timing

For private sector BC and Alberta pension plans with a calendar year-end, the first TAA must be undertaken with an effective date of December 31, 2016, and a written assessment completed by December 31, 2017. The exercise is to be repeated triennially thereafter.

Topics for Assessment

The TAA requirement is designed to force a plan administrator to do some soul-searching about how well it is administering the pension plan. At a minimum, TAA requires a review of the following:

Legislative Compliance

Plan Governance

Plan Funding

Plan Investments

Trustee Performance (if any)

Administrative Staff and Agent Performance

Administrators must retain a copy of the written assessment and make it available to the provincial pension regulator on request. There’s little doubt that regulators will undertake spot audits early in 2018 to confirm that the TAA requirements have been satisfied.

Where’s the stick?

The BC and Alberta pension legislation introduced a new enforcement tool to ‘encourage’ plan administrators to complete required tasks on time. The legislation empowers the Superintendent to order administrative penalties on corporations and administrators for contraventions of legislative provisions. The maximum penalties range from $50K to $250K for corporations or administrators and from $10K to $50K for individuals, depending on which administrative provisions have been contravened. FICOM, the BC pension regulator, issued guidelines in June of this year suggesting that the higher penalties, which are discretionary in nature, will only be imposed where there has been significant delay in completing required legislated tasks.

Even without the administrative penalty provisions, plan administrators are required to comply with applicable legislation and regulatory requirements. Failure to do so, especially if the failure leads to significant losses to the pension fund, might be viewed in subsequent court proceedings as a breach of fiduciary duty.

Penalty and fiduciary implications aside, plan stakeholders and administrators should embrace the TAA as an opportunity to assess their administrative processes. While there’s never a good time to do soul-searching of this nature, if not on a triennial basis, when would be an appropriate time to ensure that employee pensions are being properly looked after?

Start now while there’s still time

Although plan administrators have until the end of 2017 to complete their written assessments, stakeholders need to recognize that a snapshot of administrative efficiency is to be taken at year-end, so there’s little time left in 2016 to ‘right-the-ship’. They need to determine if current administrative processes sufficiently address the enumerated list of assessment topics – for example, ensure that an updated Governance Policy, Funding Policy and Statement of Investment Policies and Procedures are in place – and, if not, take steps to address any shortfalls. Failure to fill the ‘gaps’ now might lead to a failing grade when the assessment begins in earnest at year-end.

Ontario is on the verge of implementing new rights for members of registered pension plans. Members will have the right to form committees that will have broad rights to review information about all aspects of plan administration including investments. Employers who sponsor or administer a registered pension plan should familiarize themselves with these new Ontario legal requirements. They are not yet law, but likely will be in a matter of months.

Last week the Ontario government released revised draft regulations about these new legal requirements, seeking comments by September 12th, 2016. The new requirements have been kicking around in draft for the past six years and will replace current Ontario legislation regarding member advisory committees. Most employers probably haven’t heard of the current requirements regarding such committees, because the current rules have no teeth. The new ones will. You can find the new requirements here.

The new requirements will apply to pension plans that have at least 50 members (including retirees). For those plans, if 10 members (or their union) notify their plan administrator of their desire to form a member advisory committee, a process must be launched to inform all plan members and conduct a vote. If a majority of members vote in favour of establishing an advisory committee, it should be established in a matter of months. The plan administrator will have no right to representation on the committee. Reasonable expenses of the committee are payable from the pension fund.

Once a new committee is formed, the plan administrator must:

arrange for the plan actuary (for defined benefit plans) to meet with the committee at least annually;

give the committee access, at least annually, to an individual who can report on the plan’s investments; and

give information to the committee, and allow it to examine the plan records.

These new legal requirements will not give plan members a say on how their plan should be administered, but they certainly will change the landscape of members’ access to information about their pension plan. The new requirements will come into play only where there is sufficient interest among members, or unions, in forming a member advisory committee.

These new Ontario rules will create an entirely new type of scrutiny of pension plan administration. Prepare now.

The Ontario Court of Appeal’s decision in the case of Paquette v. TeraGo Networks Inc. should have all employers running to double-check and possibly amend their bonus plans. A further case released on the same day by the same panel of judges further confirmed the law set out in the Paquette decision.

Trevor Paquette had been employed by TeraGo Networks for approximately 14 years at the time of termination. He brought a motion for summary judgment and his common law notice period was found to be 17 months. The motions judge also determined that he was entitled to damages in lieu of his remuneration for the entire notice period, although he denied entitlement to damages in lieu of bonus entitlement over the notice period. The matter proceeded to appeal solely on the basis of whether or not Paquette was entitled to damages in lieu of bonus during his 17 month notice period.

Paquette’s bonus plan stated that he had to be “actively employed” at the time the bonus was paid in order to receive same. The Court of Appeal reviewed a number of similar bonus and stock option plan cases, and confirmed that the following is the state of the law in Ontario:

Subject to contractual terms, a terminated employee is entitled to compensation for all losses arising from the employer’s failure to give proper notice, and the damages award should place the employee in the same financial position he or she would have been in had such notice been given. In Paquette’s case, since he would have earned a bonus had he been given working notice, the use of the words “active employment” could not be used as an end-run around his claim for the bonus over the pay in lieu of notice period.

The test to be followed is two-fold: (i) the first step is to determine an employee’s common law rights and whether a bonus forms an integral part of the employee’s compensation; and (ii) the second step is to determine whether there is something in the bonus plan that would specifically remove that common law entitlement.

An “active employment” requirement does not preclude the employee from receiving damages representing compensation for the bonuses which the employee would have received if employment had continued through the reasonable notice period.

The key for employers then, is to ensure that the language of any bonus plan is sufficiently clear that the common law entitlement to damages in lieu of bonus is expressly removed. As every bonus plan is different and as the drafting of this sort of exclusionary language is obviously complex, legal advice should always be sought by employers when it comes to limitations set out in bonus plans.

Changes made to the Ontario Pension Benefits Act and Regulation (the “Ontario PBA”), which came into force on January 1, 2016, now require a pension plan’s statement of investment policies and procedures (“SIPP”) to include information as to whether environmental, social and governance (“ESG”) factors are incorporated into the plan’s SIPP and, if so, how those factors are incorporated. The changes have raised more questions than there are answers for plan administrators. The primary question is whether there is a legal requirement to take ESG into account or must the administrator simply consider whether, or not, to incorporate ESG?

Ontario is not the only jurisdiction to introduce ESG into the SIPP equation. In 2005, Manitoba indicated that fiduciaries could consider ESG factors provided administrators otherwise complied with statutory fiduciary duties. Not taking ESG factors into account is not a breach of any statutory law (at least not yet), but Ontario’s recent move has certainly added to the not-so-old debate: Is a failure to consider ESG factors in your pension plan’s SIPP a breach of fiduciary duty?

On a basic level, it is the fiduciary’s role as plan administrator to be responsible for investing the pension fund in accordance with the administrator’s standard of care, in a prudent manner and always in the best interest of plan beneficiaries. Pursuant to section 22 of the Ontario PBA, prudent investing entails understanding, monitoring and investigating risk. The administrator is responsible for determining what prudence requires within the context of the plan in question.

North American investors have in general been slow to incorporate ESG factors into their investment research, analysis and decision making, whereas European investors have been doing so for many years.

Canada’s large public sector pension funds, including CPP, Ontario Teachers’, HOOPP, OMERS, bcIMC and others, have now incorporated ESG into their investment policies. CPP Investment Board has stated:

“We believe that organizations that manage Environmental, Social and Governance (ESG) factors effectively are more likely to create sustainable value over the long term than those that do not. As we work to fulfill our mandate, we consider and integrate ESG risks and opportunities into our investment decisions.”

The link between ESG issues and bottom line profits and share prices was illustrated late in 2015 when BHP Billiton and Vale’s horrific mine disaster in Brazil resulted in the deaths of 17 people as well as hundreds of individuals losing their homes due to a massive dam burst. In February 2016, BHP recognized a US$1.12 billion provision related to the disaster.

The questions for administrators include:

How should you balance your primary objective to achieve optimal rates of return within an acceptable level of risk?

Should an investment target company’s ESG record take precedence over its increase in share price?

Administrators face significant hurdles in gathering relevant non-financial (or extra-financial) data if they wish to take ESG factors into account. Independent ESG research and analysis firms are available to help pension fund administrators gather materially relevant information on potential investments and their respective corporate ESG performance as well as information on external managers, many of whom are already integrating ESG factors into their investment processes.

Bottom line for administrators, if ESG factors are determined to be of importance in their investment policies and procedures, their first step is to separate the identifiable legal implications that will arise from incorporating ESG information into their SIPP and how their governance committee is expected to assess ESG analytics into their overall risk management policies. Does ESG act as a tie breaker when other financial considerations appear equal? How should administrators communicate (and document) their ESG factors and decision-making processes to the plan beneficiaries?

Plan administrators should seek legal advice to ensure their fiduciary duties are fulfilled if (and more likely when) they begin to embark on considering ESG factors into their investment decision-making process.

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